HMRC softens stance on business VAT reclaims

Businesses will be able to reclaim VAT on businesses entertainment for overseas customers, following a change of heart by the taxman. HM Revenue & Customs made its decision following recent ECJ judgments.

However, the block on recovering input tax on entertainment provided to anyone other than an overseas customer, for example UK customers and non-UK business contacts who are not customers, remains effective and any VAT incurred on the costs of such entertainment cannot be recovered.

The two cases that have influenced HMRC’s decision are Fillibeck Sohne and Danfoss & AstraZeneca.

The Sohne case is important for highlighting whether the services provided are vital to the course of business, which HMRC describes as the necessity test. In Sohne, an employer provided transport for staff to reach a construction site.

As commuting expenditure is private, the courts considered whether a charge should be applied to the VAT reclaim. However, in that case it was practically impossible for staff to make it to work without the transport, so the courts decided no charge should be applied.

In Danfoss, the issue at hand was whether services have been provided that are strictly related to the context of doing business – known as the strict business purpose test.

Free meals were provided to both employees and business contacts. Once again the courts considered whether a charge should be applied to the VAT reclaim. The courts decided that, based on circumstances such as the lack of choice and the necessity of the meals to ensure the smooth running o the business, no charge should apply.

HMRC added that in situations where a potential VAT claim is likely to be offset by a private use charge, claimants should treat the VAT incurred as non-deductible.

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